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Core investment firms: RBI panel calls for tighter governance norms

The panel has also advocated the need for inducting independent directors, conducting internal audit and preparing consolidated financial statements and ring fencing boards of CICs by excluding employees/executive directors of group firms from its board.

A working group set up by the Reserve Bank of India (RBI) has proposed stringent corporate governance guidelines for core investment companies (CICs) and restricting the number of CICs in a group to two. The group, headed by former Corporate Affairs Secretary Tapan Ray, has recommended constitution of board-level committees — Audit Committee, Nomination and Remuneration Committee and Group Risk Management Committee — in order to strengthen governance practices.

The panel has also advocated the need for inducting independent directors, conducting internal audit and preparing consolidated financial statements and ring fencing boards of CICs by excluding employees/executive directors of group firms from its board.

At present, corporate governance guidelines are not explicitly made applicable to CICs, the RBI panel said. A CIC is a non-banking financial company (NBFC) that carries on the business of acquisition of shares and securities and holds not less than 90 per cent of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Further, investments in equity shares in group companies constitute not below 60 per cent of its net assets.

“The number of layers of CICs in a group should be restricted to two. As such, any CIC within a group should not make investment through more than a total of two layers of CICs, including itself. Every group having a CIC should have a Group Risk Management Committee (GRMC),” the working group said.

In order to articulate the risk appetite and identify the risks (including excessive leverage) at the group level, the RBI panel has recommended that a GRMC be formed and also be entrusted with the responsibility to maintain oversight on the emerging risks of the entities in the group, as well as of the group as a whole.

The current threshold of Rs 100 crore asset size and access to public funds for registration as CIC should be retained, the panel said. “CICs without access to public fund may not register with the Reserve Bank. Further, it has recommended to do away with the nomenclature of ‘exempted’ CIC to obviate the scope of its misrepresentation by any entity.”

“Capital contribution by a CIC in a step-down CIC, over and above 10 per cent of its owned funds, should be deducted from its adjusted net worth, as applicable to other NBFCs. Further, step-down CICs may not be permitted to invest in any other CIC, while allowing them to invest freely in other group companies,” it added.

The complexity of large conglomerates renders opacity to the groups in terms of ownership, controls and related party transactions, it said. “In addition, as Section 186 (1) of Companies’ Act, 2013 (which restricts the group structure to a maximum of two layers) is not applicable to NBFCs, the scope of complexity gets exacerbated,” the panel said, also recommending that the number of layers of CICs in a group should be limited through regulation.